How to make a profit and loss statement

Fully understanding your business’s operating numbers can make or break your company’s success. For example, let’s say you just had a record-breaking sales month. While that’s something to celebrate, the numbers on paper might tell a different story if your overall costs exceed your profits. For situations like this, it helps to track your business spending by creating a profit and loss (P&L) statement. A P&L statement is a financial report that provides a detailed view of your business’s ability to make a profit. 

While only public companies are legally required to make a P&L statement, it can be a smart move for any business. Creating one can help you get a clearer picture of your company’s financial health. Learn more about how to make a P&L statement and what the numbers could mean for your business.

What you’ll learn:

• A profit and loss (P&L) statement is an important financial report that shows your business’s revenue, expenses, and profits or losses over a set period of time.

• The purpose of a P&L statement is to detail your business’s net profit or net loss. A net profit means your revenue is higher than your costs, while a net loss means your costs are higher than your revenue.

• P&L statements can be used externally by investors and lenders to determine how profitable your business is. Internally, they can help identify patterns and guide future financial decisions.

A P&L statement details your business’s revenue and expenses over a specific period of time. Often referred to as an income statement, it’s one of the three main reports businesses use to measure financial performance, alongside the balance sheet and the cash flow statement. P&L statements are typically created quarterly and annually to review how a business’s finances change over the time period measured.

The bottom line on a P&L statement is net income, which shows how profitable your company is. In its most basic form, net income can be calculated by subtracting total expenses from your company’s total revenue. A full P&L statement includes a range of line items that tell a more complete story of your business’s financial health.

This information gives stakeholders—both internal and external—a snapshot of how well your business is generating income, managing costs and turning a profit. Internally, P&L statements can be used to review different accounting periods and help you compare changes in revenue, operating costs and net income. Externally, investors and lenders might request your P&L before they decide to invest in your company or extend you a line of credit.

Not all business P&L statements look the same, but the main categories are typically revenue, expenses, gains, losses and net income. Here are some line items that might be shown on a P&L report. 

• Revenue: Revenue is the first line on a P&L statement. It includes all income from your business’s operating activities, like the sale of goods and services.

• Cost of goods sold (COGS): This part of the P&L statement covers the costs directly tied to producing your business’s goods and services. COGS can include raw materials, labor used in production and manufacturing overhead.

• Gross profit: Gross profit is how much money is left after subtracting COGS from revenue. Once calculated, it can show how well your business’s products or services are performing before factoring in administrative or operating costs. Knowing this figure can also help your business determine a pricing strategy. 

• Operating expenses: Operating expenses, like rent, utilities, wages, and marketing or promotions, are included in the expense portion of the P&L statement. These are the costs associated with your business’s day-to-day activities.

• Operating income: Operating income—also known as earnings before interest and taxes (EBIT)—shows how much your business has profited after accounting for operating expenses. If this figure is negative, it can also be referred to as operating loss.

• Nonoperating income: Nonoperating income includes gains and losses not related to your business’s core operations, such as interest payments. In the P&L statement, this section might be labeled as “Other (expense) income.” It can include line items like interest income, interest expenses, and unrealized gains or losses. If nonoperating activities are positive, they might be listed as “Total other income.” If they’re negative, they could be listed as “Total other expense.”

• Earnings before taxes (EBT): EBT—sometimes called pretax income, shows how much your company earns before taxes are deducted. It can be calculated by subtracting interest expenses from EBIT. 

• Income taxes: After EBT is listed, there might be a line item that includes a provision for income taxes. 

• Net profit or net loss: Sometimes called net income, this is your company’s bottom line. It represents how much your business has profited after all costs and expenses are accounted for. Even though it’s at the bottom of the P&L statement, it’s typically the first place potential lenders and investors look when deciding whether to do business with you. 

• Earnings per share (EPS): If your company is public, you might report EPS—net income divided by the weighted average number of outstanding shares—on the P&L statement. Once calculated, EPS serves as a key indicator of profitability.

There can be different ways to create a P&L statement, depending on your business’s operations and reporting needs.

• Cash method: This is a simpler way to create a P&L statement because it only includes cash actually received or paid during the period. It’s typically used by smaller businesses and sole proprietors that don’t need to account for expenses that haven’t been paid or revenue that hasn’t been earned. 

• Accrual method: This method records revenue and expenses at the time they occur, rather than when a payment is actually received or made. The accrual method provides a look at your company’s accounts payable and receivable, which shows a clearer picture of earnings over time. 

To find your company’s net income, you can choose between different types of calculations. Two common P&L calculations are single step and multistep.

• Single step: This calculation groups all revenue together and all expenses together to calculate net profit in a single equation. You might choose this type of P&L statement if you don’t need a detailed view of your business’s finances. It can be created using the following formula: Net income = All revenue − All expenses.

• Multistep: This calculation provides a more detailed overview by separating your business’s gross profit, operating income and net income. A multistep P&L statement can include various data points, like gross and operating profits, to help you better understand profitability at different stages. It can be created using the following formula: Net income = Nonoperating items + Operating income.

The process can vary from business to business, but here are some of the general steps to create a P&L statement.

Start by deciding the period of time to review your business’s net income—whether it’s annually, quarterly or monthly. Then collect the information detailing your income and expenses for that time frame.

Total all sources of income to determine your gross revenue. You might also choose to break down your revenue into different categories, like recurring revenue and one-time sources of revenue.

Total all of the costs involved in producing your goods or services, like materials and inventory.

Subtract COGS from your gross revenue to determine your gross profit.

Calculate your business expenses that aren’t related to product sales.

Your operating income—or earnings before interest and taxes (EBIT)—can be calculated by subtracting your operating expenses from your gross profit.

Add up all nonoperating income and expenses, including gains or losses from activities outside your core business operations.

Calculate EBT by adding or subtracting interest expenses from your operating income—or EBIT.

Determine your net profit or net loss by subtracting taxes from your EBT. If the final number is positive, it will be listed as net profit because revenue exceeds costs. If the final number is negative, it will be listed as net loss because costs are higher than revenue.

Here’s an example of a multistep P&L statement for a fictional flower shop.

In this example, Bloomin’ Hearts LLC is profitable for the year because its total revenue exceeds all expenses.

The three main financial statements in business are the P&L statement, the balance sheet and the cash flow statement. Used together, they can provide an in-depth view of how well a company is operating on a day-to-day basis. Here’s how the P&L statement compares with the other financial statements.

• P&L statement versus balance sheet: The P&L statement reports a company’s performance over a period of time, detailing revenues, expenses and profits. The balance sheet, on the other hand, provides a specific-period snapshot of what a business owns and owes. 

• P&L statement versus cash flow statement: Both the P&L and cash flow statements provide insights into your business’s financial performance over a period of time, but they track different information. The P&L statement looks at revenue, expenses and profitability, while the cash flow statement measures how cash flows in and out of your business.

A P&L statement provides important information about your business’s financial health and tracks key metrics. Creating a P&L statement can help you make smarter business decisions and inform the best next steps for your company.

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